10 June 2019
You may be diligently saving towards your retirement and your children’s education, but are you prepared for the unexpected? If you do not have a financial buffer in place and you experience a financial setback – will you be able to meet your financial obligations without having to tap into the money you have saved for other goals?
The aim of building an emergency fund is to help you recover from an unforeseen financial event as quickly as possible. General guidance is that you should aim to save at least three to six months’ expenses, but this may not always be appropriate. For example, if you lose your job and you are in an industry where your skills are well sought after, you have a good chance of being in a new job and earning again within three to six months. However, if you lose a job due to an industry-wide issue, it may take longer. For reasons like these, the ideal amount depends on your individual risks and circumstances.
Another way to enhance your financial resilience is to adapt the way you think about money. One approach is to view saving as deferred spending. By not spending now and building an emergency fund, you are deferring your spending to a future date, when you may have expenses that you have not anticipated. This puts you in a better position to afford these expenses without running into financial trouble.
If you understand how savings and debt affect your financial resilience, you can take control over your financial position. When you use credit to pay for something and you get into debt, you are essentially consuming something now that you will need to pay for later. If you bring consumption forward and an unexpected expense comes your way and you are putting your financial resilience in a vulnerable position, because you will still be obligated to pay for the item you consumed. You will not have a choice.
Some types of consumption are fixed, such as your bond or rent repayments. These are living expenses that you have no discretion over. There are other types of consumption, such as luxury purchases, that you do have discretion over. When you pay for these items on credit, you are consuming them before you have the money to pay for them – and you are changing something that might be a discretionary expense into a fixed expense. With this is mind, aim to avoid getting into debt unnecessarily.
In the South African context, the support structures that you belong to impact your financial resilience. If you are a family breadwinner, you need to plan for your expenses (expected and unexpected) as well as the financial needs of those who depend on you.
On the other hand, you may be getting financial support from someone else – in which case, an emergency might not be something that happens to you, but rather to the person who assists you financially. It is essential that you understand these risks and take your support structures into account when you’re planning your finances.
One of the key benefits of seeking professional advice is that it provides an objective perspective, which is valuable no matter whether you are planning your finances or dealing with an emergency. These can both be overwhelming and emotionally charged experiences. Meeting regularly with an expert financial adviser can help you to manage your monthly expenses more prudently, gain an accurate understanding of your risks, save for emergencies and improve your financial resilience.